Edelweiss Top Picks: CAS Research Desk January, 2011

Edelweiss Top Picks

CAS Research Desk
January, 2011

Index

CAS Research Desk CAS Research Desk

Index .............................................................................................................................................................. 2
Markets ‐ Fundamental View ........................................................................................................................ 3
Markets ‐ Technical View .............................................................................................................................. 5
Markets ‐ Technical View .............................................................................................................................. 7

Top Picks ‐ Fundamental
Hexaware Technologies (HEXTEC) ................................................................................................................ 8
Ashok Leyland (ASHLEY) ................................................................................................................................ 9
South Indian Bank (SOUIND) ....................................................................................................................... 10

Top Picks – Technical
Unitech Ltd (UNILTD) .................................................................................................................................. 11
Punj Lloyd (PUNLLO) ................................................................................................................................... 12
State Bank of India (STABAN) ...................................................................................................................... 13

Performance Tracking
Fundamental – Performance Report .......................................................................................................... 14
Technical – Performance Report ................................................................................................................ 15
Disclaimer.................................................................................................................................................... 16

1st January, 2011 2|P a g e

Markets ‐ Fundamental View


The Year 2010 was silvery for gold; golden for silver… stock markets did their bit

as well… New Year 2011… What’s in store…?

Indian Markets have done reasonably well in the year 2010 with the frontline indices Sensex and Nifty
up 17% for the year. The lead winners for the year were the banks, autos, pharma and IT while the
losers being the realty and construction stocks.
The precious metals markets were super strong, gold prices up 28% and silver rallying 81% for the year.
Oil prices rose 13% but the pain for consumers came from food inflation though.
The year 2010 witnessed record FII flows with inflows at ` 1.35 lakh crores (US$ 30 billion). In sharp
contrast, DIIs remained sellers for the year with secondary market selling to tune of ` 22 thousand
crores (US$ 5 billion). Looking deeper within the DII pack the selling has come in from the Mutual Funds
which were facing redemption pressure while the Insurance industry has been a net buyer.
Retail investors made big money from IPOs – especially PSU ones like Coal India, United Bank, MOIL
where government got its act right and priced them well.
So, what’s in store in 2011 and what should you look out for?
What can be in?
• Structural India plays – Select Autos, Banks, Media, and Consumers
The India story – Consumption and Investment led would continue to do well, stocks providing
valuation comfort should be backed over here.
• The Oil Trade
With QE 2 money and global recovery taking shape, oil exploration and refinery stocks can post strong
gains in 2011.
• Metals – high correlation to global recovery
Hard commodities are highly correlated to the condition of global economy. With excess liquidity, global
economic rebound on the cards, these stocks could hog the limelight as well in 2011.


What can be out?
• Telecoms, 2011’s the year of action for them
It’s going to be the time of execution for Indian Telecoms. Players, incumbent and new operators will

have to face it in the battle field with 3G and Mobile Number Portability (MNP) coming through,
competition to heat up again.
• Frontline Cement, valuations high, supply overhang to continue
Oversupply and high valuations is a reason we believe frontline cement would continue to be out of

flavor in 2011.
What are the trickiest ones?
• Real Estate and Construction
Corporate Governance issues at their peak in 2010, 2011 can be a year of recovery or a year of coma
where these stocks do nothing; chances for either seem to be 50:50…
Our Fundamental top picks are as follows:‐
• Hexaware Technologies
• Ashok Leyland
• South Indian Bank
We wish all our clients and their families a very Happy and Prosperous 2011.

Markets ‐ Technical View


Indices Nifty Dow Jones

Closing Price 6134 11570
Trend
Nifty
Last month, Nifty took support and bounced back from its November 2010 month’s low. Also, index
manages to break its resistance of 6069 during later part of the month along with good volumes. It had
made a high of 6147 after breakout which was also December month’s high. Finally, this index closed the
year end at 6134 with a gain of 4.52% on m‐o‐m basis. On the daily chart, this Index had formed Higher
Tops and Higher Bottoms and continued to trade above its Short Term Moving Averages. Short Term
Oscillator on daily chart continued its uptrend and Directional Index ADX had given Buy signal indicating
upside momentum to continue. Thus, going forward, if Nifty continuously trade above 6069 levels, then
we can see further upside till 6250/6285 and above that it can also test its November high of 6335.
Downside Nifty has strong support at 5950 levels breach of this level will negate our medium term bullish
outlook.




Dow Jones

As expected last month Dow Jones broke the mentioned resistance of 11451 and continued its upside
journey and made a high of 11625. Finally Dow Jones closed at 11570 with gain of 4.87% on m‐o‐m
basis. Going forward, we continue to maintain our bullish outlook on this index as Oscillator on daily
chart continued to show its strength. Further, on monthly chart this index continues to make Higher Top
and Higher Bottom indicating upside momentum to continue. Going forward, we expect this index to
trade with positive bias and likely to test 11855 levels. On downside, it had strong support at 11451
which is also its 20 DEMA.




Bank Nifty

After, making high of 12536 this index witnessed sharp correction of ~12% during the month. It managed
to bounce back from its support of 11,000 and had retraced more than 50% of its correction from 12536
to 10978. Further, it had generated “Triangle Pattern” breakout in last trading session of the month.
Also, it had breached and closed above its 20 DEMA of 11760. Going forward, we expect this index to
trade with positive bias and it is likely to test 12150 levels. On downside, it has strong support at 11451
breach of this level will negate our medium term bullish outlook on this index.


Hexaware Technologies (HEXTEC)

Fundamental – BUY

Sector Target Mkt Cap (` Cr.) 52W High 52W Low
CMP ‐ ` 116 IT ` 132 ` 1,624 ` 121 ` 64

• Hexaware Technologies (HEXTEC) is an IT‐services company, specialized in offering enterprise
solutions, application management, and embedded system.
• The company provides software services to banking and financial services, insurance, travel &
transportation, emerging segments (manufacturing and healthcare) verticals. Hexaware has a
dominant PeopleSoft practice and is amongst the Top 20 software and services exporter from India.
The company’s last twelve month revenues stood at INR 10.1 bn (USD 219 mn) and it employees
6,308 people.
• Over the past one year Hexaware has focused on improving operational efficiencies and re‐aligned
itself vertically from earlier horizontal sales‐based approach. Further, strengthening of the sales
force with 16 new recruits and new deal wins reported in the past six months are likely to result in
improving revenue traction going forward.
• High US and BFSI exposure should aid growth in an improving macro environment. We see
Hexaware fundamentally strengthened with the recent initiatives and with a healthy cash position it
is well poised to explore inorganic growth opportunities as well.
• We believe worst in terms of operating margins is behind and improvement in margins will continue
to follow. The stock at the CMP of 117 ` trades at 10x CY11E EPS and 1.7x CY11E book value. We
assign it a Target Price of 135, implying valuation multiples of 1.9x CY11E earnings.
Income Statement (` Cr) Balance Sheet (` Cr)

Year to March CY09 CY10E CY11E Year to March CY09 CY10E CY11E
Revenues 10,386 10,454 12,395 Shareholders’ funds 8,497 9,450 10,399
EBITDA 2,023 858 1,596 Borrowed funds 173 250 0
Sources of Funds 8,670 9,700 10,399
PBT 1,446 820 1,820
Net block 1,893 2,414 3,048
Net profit 1,343 971 1,566
Sundry debtors 1,526 1,776 2,241
EPS (`) 9.4 6.8 10.9 Cash and equivalents 2,992 3,198 3,623
Book Value (`) 59.2 65.9 72.5 Others 2,259 2,312 1,487
Div. per share

1.4 1.4 1.4 Uses of Funds 8,670 9,700 10,399

Growth Ratios (%) Valuation Parameters (%)
Year to March CY09 CY10E CY11E Year to March CY09 CY10E CY11E
Revenues ‐9.8 0.7 18.6 Diluted PE 13 18 11
EBITDA 57 ‐57.6 86 Price/BV 2.0 1.8 1.6
PBT 76.2 ‐43.3 122.1 EV/Revenues 1.1 1.1 0.8
Net Profit 101.6 ‐44.4 109.6 EV/EBITDA 5.6 12.5 6.1
EPS

95.8 ‐27.9 61.3 Dividend % 1.2 1.2 1.2


Ashok Leyland (ASHLEY)

Fundamental – BUY

CMP ‐ ` 64 Automobiles ` 90 ` 8,294 ` 82 ` 46

• Ashok Leyland (ASHLEY) is the second largest commercial vehicle (CV) company in India (27% market
share in Q1FY11) and offers a pure‐play exposure to the CV segment. The company is one of the key
beneficiaries of increase in infrastructure activity, recovery in commercial vehicle space and is well
positioned to benefit from the growth in the Indian economy. ASHLEY is also set to benefit from the
passenger bus segment, which is expected to revive as road construction gains momentum and
private participation increases. In addition its new plant at Uttaranchal offers an excised duty break
that adds to the bottom‐line.
• Demand for commercial vehicles is robust spurred by the strong industrial and agricultural growth.
ASHLEY has been gaining market share (from 17% in Q1FY10 to 27% in Q1FY11) due to faster
recovery in the multi axle vehicle space and South India markets—both of which are strong
segments for the company.
• ASHLEY has introduced new products based on the U‐Truck platform with the more powerful
Neptune engine in October 2010. Over a period, the company expects a shift towards vehicles with
a higher body to weight ratio, for which the new Neptune engine will be critical. We expect ASHLEY
to remain cash flow positive despite high capex and investments of ` 20 bn over the next two years.
Despite the high capex, D/E is likely to remain comfortable at 0.9x
• We expect earnings CAGR of 37% over FY10‐12E on the back of strong top‐line growth (25% CAGR
over FY10‐FY12E). Also return ratios are expected to pickup from current FY10 level of ROE of 11.7%
to 17.1% in FY11E and 18.2% in FY12E. At CMP of 64, the stock on FY11E basis trades at 12.8x
earnings, 2.1x book and 9.5x EV/EBITDA and on FY12E basis it trades at 10.7x earnings, 1.8x book
and 8.2x EV/EBITDA. We believe at the CMP of 64, valuations are very attractive and hence
recommend a ‘Buy’ with a target price of ` 90 at which it trades at 15x earnings.

Year to March FY10 FY11E FY12E Year to March FY10 FY11E FY12E
Revenues 7,281 10,720 12,545 Shareholders’ funds 3,669 4,098 4,662
EBITDA 801 1,184 1,411 Borrowed funds 2,653 3,287 3,725
PBT 537 817 983 Sources of Funds 6,321 7,385 8,386
Net profit 424 662 796 Total fixed assets 4,816 5,175 5,506
EPS 3.1 5.0 6.0 Investments 326 776 1,226
Book Value 27.6 30.8 35 Net current assets 1,179 1,434 1,654
Div. per share

1.5 1.5 1.5 Uses of Funds 6,321 7,385 8,386

Growth Ratios (%) Valuation Parameters (%)
Revenues 20.9 47.2 17 Diluted PE (x) 20.6 12.8 10.7
EBITDA 16.9 50 17.5 Price/BV (x) 2.3 2.1 1.8
PBT 12.4 41.3 6.8 EV/Sales (x) 1.5 1.1 0.9
Net profit 193.6 59.3 20.3 EV/EBITDA (x) 13.3 9.5 8.2
EPS

193.6 59.3 20.3
ROE (%) 11.7% 17.1% 18.2%

South Indian Bank (SOUIND)

Fundamental – BUY

CMP ‐ ` 24 Banks ` 34 ` 2,729 ` 29.5 ` 13

• South Indian Bank (SOUIND), a private sector bank has a pan‐ India presence with a network of over
550 branches and over 300 ATMs across 23 states, and 2 Union Territories. ~56% of the branches
are in Kerala.
• We like the bank for its strong regional presence, good technology network, robust loan growth,
improving asset quality, and possible M&A play due to diversified shareholding
• SOUIND scores well on key banking metrics with Capital Adequacy Ratio (CAR) at 14.7%, Gross NPAs
at 1.27% of advances, Net NPAs at 0.38% of advances, Provision Coverage at 71%, Restructured
Assets to Advances to the tune of 2.5%.
• We expect the bank to deliver earnings CAGR of 23% over FY11 and FY12 with ROEs of 18.3% and
19.4% respectively. At CMP of 24.2, the stock on FY11E basis trades at 9.3x earnings, 1.6x book and
on FY12E basis it trades at 7.6x earnings, 1.4x book. We believe at the CMP of 24.2, valuations are
very attractive and hence recommend a ‘Buy’ with a target price of ` 34 at which it trades at 2x
FY12E adjusted book.

Net Revenues 8,232 9,818 11,802 Shareholder’s funds 14,672 16,995 19,862
PPP 4,570 5,079 6,210 Deposits 230,115 289,867 362,068
PBT 3,666 4,373 5,397 Borrowings & Others 10,373 23,707 19,162
Net profit 2,331 2,891 3,568 Sources of Funds 255,160 330,569 401,092
EPS 2.1 2.6 3.2 Total fixed assets 1,345 1,560 1,758
Book Value 13 15 18 Advances 158,229 205,698 257,122
Dividend per share 0.4 0.4 0.4 Investments 91,433 112,172 133,624
Diluted PE (x) 11.6 9.3 7.6 Other Assets 4,153 11,139 8,588
Price/BV (x)

1.9 1.6 1.4 Uses of Funds 255,160 330,569 401,092

Growth Ratios (%) Key Parameters (%)
NII Growth 8.7 40.5 21.9 Gross NPA ratio (%) 1.3 1.1 0.9
Fees Growth 74.9 11.2 9.6 Net NPA ratio (%) 0.4 0.3 0.3
PPP Growth 26.2 11.1 22.3 Provision coverag. (%) 70.8 69.9 72.4
Provisions Growth 49.1 ‐21.9 15.1 Capital Adequacy (%) 12.7 12.0 11.7
Net Profit Growth 19.7 24.0 23.4 Low Cost Deposits (%) 23.1 23.5 23.8
Credit 31.7 29.9 25.0 Net NPA / Equity (%) 4.2 3.9 3.3
Deposit

27.2 26.0 24.9 ROE (%) 16.9 18.3 19.4


Unitech Ltd (UNILTD)

Technical – BUY CAS Research Desk CAS Research Desk

Time Horizon Target Stop Loss 52W High 52W Low
CMP – ` 66.3 1 Month ` 73.6 ` 62.6 ` 101 ` 46

Stock had generated “Triangle Pattern” breakout accompanied by huge volumes on its daily chart. Further,
it had breached its narrow trading range of 61 – 65. Also, stock manages to break and close above its 20
DEMA of ` 64.7. Short Term Oscillator on daily chart continue their positive momentum indicating positive
momentum to continue in the counter.

Buying is recommended at CMP of ` 66.25 with target of ` 73.60 and stop loss of ` 62.60 (closing basis)

Punj Lloyd (PUNLLO)


CMP – ` 112 1 Month ` 124.8 ` 105.6 ` 226 ` 79

Stock continued its uptrend since Mid‐December which is demonstrated by Higher Top and Higher Bottom
on its daily chart. It had generated “Triangle Pattern” breakout along with huge volumes on its daily chart.
Further, stock manages to breach and close above its 20 DEMA. Short Term Oscillator on daily chart
continued its uptrend indicating upside momentum to continue in the counter.

Buying is recommended at CMP of ` 112 with target of ` 124.80 and stop loss of ` 105.60 (closing basis)

State Bank of India (STABAN)


CMP – ` 2812 1 Month ` 3000 ` 2670 ` 3515 ` 1863

After consolidating in the range of 2788‐2725 stock had generated “Triangular Pattern” breakout as well as
it broke the 21DEMA with good volumes. Beside this on the daily chart stock continue to make Higher Top
and Higher Bottom, further indicating uptrend to continue in the stock. Short Term Oscillators on daily chart
had generated bullish crossovers indicating positive momentum to continue in the counter.

Buying is recommended at CMP of ` 2806 with target of ` 3000 and stop loss of ` 2670

Fundamental – Performance Report


Recommendations Reco. Price CMP Returns View

PTC India Ltd (PTCIND) 124 127 2.4% Add
Shiv‐Vani Oil & Gas Exp Ltd (SHIOIL) 462 394 ‐14.7% Add
Bajaj Holdings & Investments Ltd (BAJHOL) 862 874 1.4% Add
Infotech Enterprises Ltd (INFENT) 165 172 4.2% Hold
Oriental Bank of Commerce (ORIBAN) 495 405 ‐18.2% Add

Technical – Performance Report


Performance of December, 2010 Recommendations
Exit Returns
Recommendations Type Reco. Price Target SL Remarks
Price (%)
Karnataka Bank Ltd Buy 164.9 181 154.8 173.85 5.4% Booked Profits
Aban Offshore Ltd Buy 699.4 750 676 741 5.6% Booked Profits
Neyveli Lignite Corporation Ltd Buy 130 145 122.3 135.4 4.2% Booked Profits

Performance of November, 2010 Recommendations
Exit Returns
Price (%)
Hanung Toys & Textiles Ltd Buy 362 400 339 404 11.45% Booked Profits at 404.0

Bank of Baroda Buy 1014 1100 967 967 ‐4.6% SL Hit
SREI Infrastructure Finance Ltd Buy 132 160 122 122 ‐7.5% SL Hit

Performance of October, 2010 Recommendations
Exit Returns
Price (%)
Aptech Ltd Buy 170 206 159.5 159.5 ‐6.2% SL Hit
Karnataka Bank Buy 186.2 220 178 178 ‐4.4% SL Hit
ABG Shipyard Ltd Buy 293.7 330 272 315.75 7.5% Booked Profits at 320.9


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It’s going to be the time of execution for Indian Telecoms. Players, incumbent and new operators will

Oversupply and high valuations is a reason we believe frontline cement would continue to be out of

Income Statement (` Cr) Balance Sheet (` Cr)

Income Statement (` Cr) Balance Sheet (` Cr)

Income Statement (` Cr) Balance Sheet (` Cr)

Shiv‐Vani Oil & Gas Exp Ltd (SHIOIL) 462 394 ‐14.7% Add

Bajaj Holdings & Investments Ltd (BAJHOL) 862 874 1.4% Add

Infotech Enterprises Ltd (INFENT) 165 172 4.2% Hold

Oriental Bank of Commerce (ORIBAN) 495 405 ‐18.2% Add

Hanung Toys & Textiles Ltd Buy 362 400 339 404 11.45% Booked Profits at 404.0

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